Public sector missing the SME target

It is no secret that the UK government has set a target of awarding 25%
of all contracts to SMEs by 2015. But we all know it is easy to set targets (and they make for
great headlines), but it is often much harder to achieve them than people expect. That certainly
seems to be true, in this case, judging by a recent report from The Cabinet Office entitled
Making government business more accessible to SMEs: Two years on.

The report revealed the UK government had increased its
direct spend with SMEs from 6.5% in 2009-10 to10.5% in 2012-13. While a decent enough increase in
its own right, something spectacular would need to occur over the next two years for the government
to get anywhere near its target. If growth trends for those three years (60% increase) stayed the
same for the next two, the most the government could hope to achieve would be around 15%. It did
not help that four government departments actually decreased their spending with SMEs in the
2012-13 year.

The government has acknowledged the figures are not growing fast enough. Commenting on the
report, Chloe Smith MP, minister for political and constitutional reform, said: “These figures are
encouraging, but clearly more needs to be done to reach our 25% aspiration. We are clearer about
the task ahead; we have much better data than in the past and, through our ongoing engagement with
SMEs, a better idea of the remaining ‘roadblocks’ that we need to tackle.”

One person who has been more than happy to highlight where those roadblocks remain is Kate
Craig-Wood, founder of Memset.

“The Cabinet Office are saying the right things, and it is clear that some people do want things
to change,” she says. “However, the reality is lagging far behind, especially for any work
requiring security clearance.” She says too many senior civil servants have become set in their
ways and are happy to “just deal with a few IT companies and exclude the rest”.

SMEs and government: A cultural problem

“Perhaps the biggest problem of all is culture, which affects every aspect of government IT
procurement,” says Memset founder Kate Craig-Wood. Government business managers still classify much
of their information too highly, she argues, so more falls into IL3 than really needs to.

“Then the designers of the systems may not yet have the skills to use the SIAM model, which
splits a requirement into layers and enables commodity services such as those on G-Cloud to be
used, rather than ‘soup-to-nuts’ bespoke systems which only large companies can deliver,” she
says.

Then it is the turn of “the commercial folks” to produce 70-page pre-qualification
questionnaires (PQQs) or set “unnecessarily high requirements for annual turnover, or aggregating
services so that no SME could possibly meet the requirements”.

And if they get through all of that, the security community makes life so complicated that SMEs
“simply don’t have the resources to commit to overcoming the security processes”.

Getting through security

Security clearance is a major requirement for government work and a serious inhibitor,
Craig-Wood adds. Some opportunities are opening up for unclassified work, “but this is still a
small minority of work, such as the customer-facing parts of websites”.

Security accreditation for the next level up, IL2, is based on the industry standard ISO27001,
“but the government has overlaid this with bureaucratic processes which take far more effort and
cost than is necessary”, Craig-Wood says. “Too much of the effort goes into ‘feeding the beast’ of
the administrative process, which simply does not add value or security.”

The processes at the next level, IL3, are “many times more complex, time consuming – and
expensive”, requiring the use of CESG-approved consultants to understand the process and access
some of the information and approved contractors to carry out the required IT Health Checks. There
are hundreds of pages of documentation.

“At best, all of this cost and complexity causes delays of many months and at worst it stops
smaller companies from entering the battle of attrition, which is what it feels like,” Craig-Wood
says.

A supplier seeking to offer G-Cloud
services at IL3 needs to use the PSN for network services connecting the supplier to the customer.
“But PSN IL3 network services simply do not exist yet,” she says. As a result, “new entrants are
totally blocked from delivering IL3 services. In the meantime, the current suppliers continue to
use the old connection methods such as GSI. So the old suppliers, either directly or via SME ‘flags
of convenience’ who act as a front on G-Cloud, are the only ones who can deliver IL3 G-Cloud
services and are getting themselves comfortably established before new, innovative suppliers have a
chance.”

Phil Dawson, CEO at Skyscape
Cloud Services, has a more positive view, describing the report as “a strong indicator of the
positive impact that the government’s support of SMEs is having in the public sector market”. He
says the G-Cloud Framework is “continuing to deliver significant improvements in the public
sector’s use and procurement of IT services” with 30,000 public sector organisations in the UK able
to procure and access services from an open and transparent marketplace.

“The programme is delivering significant cost savings to the sector, which benefits each and
every UK citizen and taxpayer,” Dawson adds. He accepts the common criticism of the programme that
the reported spend is relatively low but claims it “is important to note that every £1 spent via
G-Cloud equates to £10 spent on old-world ICT. Indeed, what is now available via the Framework is
three to four times cheaper than what it is replacing, and so we should be focusing on the huge
amount of money saved rather than money spent.”

Dawson has “high hopes that the long term goals of 25% of government contracts going to SMEs can
be met” although more needs to be done to realise the target.

Whether the government meets its target or not, the business is welcome. Ian Jackson, managing
director at Imerja
says there is “massive potential” for channel companies from the public sector with many
organisations “turning to IT to help them become more efficient and in turn make savings”. Imerja
is a case in point: “As a business we’ve grown year-on-year and over 75% of our revenue is derived
from public sector contracts, so the market has been full of potential for us
specifically.”

Ian Wells, director for Northern EMEA at Veeam
Software says the government has followed through on its promise to some extent, stating: “More
contracts are going to local channel partners instead of a previous focus on large, global system
integrators: partly through a desire to ‘buy British’, and partly because these local operators can
often deliver a faster, more focused solution to specific problems thanks to better local knowledge
and greater flexibility in creating bespoke solutions.”

He believes many more opportunities are being created for the channel with the public sector as
a result: “When offering technologies and services, the ongoing push for austerity means anything
that helps the public sector gain more value from their IT contracts will be most welcome.

More value for the taxpayer

Michael Keegan, executive director for the Fujitsu
Technology Product Group, says that if the public sector opened its doors to SMEs, the market
would be more competitive and it would reduce spend and deliver “more value per taxpayer pound for
the channel”.

But he agrees with Craig-Wood that the government does
not always make it easy for small businesses. Keegan argues the government needs to accept that
SMEs are “incapable of taking some of the risks historically transferred to large suppliers.”

Keegan says all the parties involved need to be willing to change: “The government has to
realise that SMEs cannot swallow the financial risk and long procurement times involved in
government contracts and SMEs have to be flexible and adapt to meet the requirements of trading
with the public sector.”

He stresses there are opportunities in the public sector for channel partners in all areas of
technology, but they need to find the right partners [ie, vendors] who invest in product service
and innovation and are committed to supporting the channel through programmes which help them sell
in the right way to the public sector.

Robin Phillips, head of bid management at Trustmarque, believes
the government should be applauded for trying to increase engagement with SMEs but says that, even
with initiatives such as G-Cloud, the proportion of state spending going to SMEs is tiny.

“A large chunk of SME spend is still indirect, via the major integrators’ supply chains, where
the customer benefits of SME engagement can be very diluted,” he says. “Public sector customers are
attractive to SMEs because of their sizeable budgets, plentiful opportunity to deliver business
improvement and bulletproof credit lines. But the costs of sale can be punitive to some SMEs as
they try to navigate the tortuously long procurement process. In many cases, the risk of tying up
scarce resources in bidding for major contracts, combined with the perception of a closed shop of
major players, can put SMEs off.”

Phillips says there is also reluctance from the customer side given the natural risk averseness
of public sector buyers.

Finding a niche

Mark Whelan, head of service integration and governance at Phoenix,
says there are real opportunities for SMEs in niche areas such as collaboration and specific cloud
technologies but in the areas of commoditised on-demand services, there is less opportunity due to
issues of scale and price point. “Increasing use of lean procurement and G-Cloud should ease the
governance burden on smaller suppliers,” he says. “But they still need to invest in creating
sustainable partnerships with more experienced suppliers to open significant revenue streams.”

Peter Groucutt, managing director at Databarracks
agrees with Whelan that some SMEs are making inroads in specific cloud technologies, particularly
with the G-Cloud framework. “Through G-Cloud and the services available through the CloudStore, the
public sector has been able to cut through the red tape and access the newest and most innovative
cloud services from specialised SMEs,” he says. “The continued support shown by suppliers is a
testament to the framework and what it stands for and it is encouraging that smaller suppliers are
starting to see the benefits of public sector procurement.”

He claims momentum is growing in monthly sales figures and there’s a change in general attitudes
towards IT procurement. But Groucutt stresses that it is an ongoing process: “While the
conversations we’re having with cloud providers are becoming more positive, in order for the public
sector to open up to SMEs, it is imperative we continue to build awareness of the opportunities
available to them.”

Most people agree that more needs to be done to boost the share of public sector business for
SMEs. Dawson at Skyscape Cloud Services says education is key moving forward to make the buying
community aware of the ease with which they are able to bring their services to market via GCloud,
either on their own or by partnering with existing providers. “More should be done to explain the
cost savings in real terms, in order to truly communicate the benefits that we are now seeing
within the public sector,” he says.

Craig-Wood at Memset takes a slightly less positive view of the work to date. “The latest
figures from Cabinet Office show that virtually no progress has been made in increasing the amount
of work going directly to SMEs,” she says. It remains at just over 10% despite the rhetoric – and
the genuine efforts by some.”

Given the barriers that SMEs have to negotiate to get public sector business this may not be
surprising but Craig-Wood says it proves “more must be done, and urgently, if SMEs are really to
form a significant part of the government IT market.”

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